Fast and easy

Dear Congressman,

Today I would like to talk to you about trading stocks. I have been trying to understand this whole high frequency trading business. It seems to be a pretty good deal for whoever is running these programs. Remember the Dow Average crashing over 1,000 points in a matter of minutes for reasons no one can explain (or maybe cares to explain) and, for the last year or two, the market has been lurching around like Edgar Allen Poe at an open-bar wedding reception? The reason why might be high frequency trading. But rather than tackle the entire market economy in one blog entry, let's concentrate on how high frequency trading works.

This is the process as I understand it. (please note I have simplified the steps somewhat but conceptually it should be correct)

1. I put in an order to buy stock, saying the most I am willing to pay is $10.

2. The other party out there wants $9.50 to sell their shares.

3. The high frequency program will (in milli-seconds) recognize this imbalance, buy the shares for $9.50 and sell them to me for $10, pocketing the 50 cents per share difference.

How is this allowed to happen, you ask?

Money, is the correct reply. For a fee, the high frequency traders are plugged into the trading computers and reading orders before they reach everyone else. So they can read the data ahead of time and make the markets more efficient, basically by skimming off of every transaction that comes across the exchange electronically.

So now we know how Goldman and the other "too big to fail" banks out there have been making insane amounts of money over the last year without providing any goods or services to promote the welfare of the country. They have found a new way to game the system. They are not only "too big to fail", but they are also "not too proud to cheat".

Since most mutual funds and hedge funds have figured this little game out, they have started trading in "black pools", where they are not subject to the shark fins attached to an algorithmic computer program. So who is getting skinned alive and not even aware of it?

You guessed it. It is you and me, the retail investor, that is paying the bill for this shell game. If it were anyone else other than the US taxpayer/uninformed investor, this process for printing money would have been shut down ages ago.

Technically, I am incorrect in calling High Frequency traders "cheats", as they are legal and highly profitable for the exchanges that allow them. I don't think I am incorrect in calling them unfair.